Pub Date : 2020-11-26DOI: 10.1108/raf-10-2019-0224
Binod Guragai, P. Hutchison
Purpose Prior literature provides empirical evidence that financial performance improves for core remaining operations after a firm discontinues some of their operations. This study aims to examine whether the association between discontinued operations and future financial performance improvement is affected by a regulatory rule (i.e. Statement of Financial Accounting Standards 144 [SFAS 144]) that significantly altered the reporting requirements of discontinued operations. This study also examines whether the association is dependent on the profitability of the operations discontinued. Design/methodology/approach Ordinary least square regressions are used to test the association between discontinued operations and financial performance improvement, conditional on the profitability of operations discontinued in the pre-SFAS 144 and SFAS 144 regulatory regimes. Data on profitability of operations discontinued is hand-collected. Findings Results suggest that firms experience improvement in financial performance following the reporting of discontinued operations in the pre-SFAS 144 era. Using hand-collected data on the profitability of operations discontinued, this research study also shows that improvement in performance is stronger for firms that discontinue loss operations compared to those that discontinue profitable operations. Originality/value This study explores the impact of regulatory change on the association between discontinued operations and future performance. Furthermore, unique hand-collected data is used to understand whether financial performance improvement is conditional on the profitability of the operations discontinued. Results documented in this paper should be of interest to investors, regulators and analysts in understanding the long-term strategic implications of discontinued operations.
{"title":"Financial performance following discontinued operations","authors":"Binod Guragai, P. Hutchison","doi":"10.1108/raf-10-2019-0224","DOIUrl":"https://doi.org/10.1108/raf-10-2019-0224","url":null,"abstract":"\u0000Purpose\u0000Prior literature provides empirical evidence that financial performance improves for core remaining operations after a firm discontinues some of their operations. This study aims to examine whether the association between discontinued operations and future financial performance improvement is affected by a regulatory rule (i.e. Statement of Financial Accounting Standards 144 [SFAS 144]) that significantly altered the reporting requirements of discontinued operations. This study also examines whether the association is dependent on the profitability of the operations discontinued.\u0000\u0000\u0000Design/methodology/approach\u0000Ordinary least square regressions are used to test the association between discontinued operations and financial performance improvement, conditional on the profitability of operations discontinued in the pre-SFAS 144 and SFAS 144 regulatory regimes. Data on profitability of operations discontinued is hand-collected.\u0000\u0000\u0000Findings\u0000Results suggest that firms experience improvement in financial performance following the reporting of discontinued operations in the pre-SFAS 144 era. Using hand-collected data on the profitability of operations discontinued, this research study also shows that improvement in performance is stronger for firms that discontinue loss operations compared to those that discontinue profitable operations.\u0000\u0000\u0000Originality/value\u0000This study explores the impact of regulatory change on the association between discontinued operations and future performance. Furthermore, unique hand-collected data is used to understand whether financial performance improvement is conditional on the profitability of the operations discontinued. Results documented in this paper should be of interest to investors, regulators and analysts in understanding the long-term strategic implications of discontinued operations.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"429-447"},"PeriodicalIF":2.4,"publicationDate":"2020-11-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-10-2019-0224","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47842561","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-08-24DOI: 10.1108/raf-10-2018-0219
Fabio Filipozzi, Kersti Harkmann
This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.,The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach.,The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies.,The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.
{"title":"Optimal currency hedge and the carry trade","authors":"Fabio Filipozzi, Kersti Harkmann","doi":"10.1108/raf-10-2018-0219","DOIUrl":"https://doi.org/10.1108/raf-10-2018-0219","url":null,"abstract":"This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.,The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach.,The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies.,The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"411-427"},"PeriodicalIF":2.4,"publicationDate":"2020-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-10-2018-0219","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46853622","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-08-06DOI: 10.1108/raf-05-2019-0109
Xiang Gao, John C. Topuz
Purpose - This paper aims to investigate whether the cyclicality of local real estate prices affects the systematic risk of local firms using a geography-based measure of land availability as a quasi-exogenous proxy for real estate price cyclicality. Design/methodology/approach - This paper uses the geography-based land availability measure as a proxy for the procyclicality of real estate prices and the location of a firm’s headquarters as a proxy for the location of its real estate assets. Four-factor asset pricing model (market, size, value and momentum factors) is used to examine whether firms headquartered in more land-constrained metropolitan statistical areas have higher systematic risks. Findings - The results show that real estate prices are more procyclical in areas with lower land availability and firms headquartered in these areas have higher systematic risk. This effect is more pronounced for firms with higher real estate holdings as a ratio of their tangible assets. Moreover, there are no abnormal returns to trading strategies based on land availability, consistent with stock market betas reflecting this local real estate factor. Research limitations/implications - This paper contributes to the literature on local asset pricing factors, the collateral role of firms’ real estate holdings and the co-movement of security prices of geographically close firms. Practical implications - This paper has important managerial implications by showing that, when firms decide on the location of their buildings (e.g. headquarters building, manufacturing plant and retail outlet), the location’s influence on systematic risk should be part of the decision-making process. Originality/value - This paper is among the first to use a geography-based measure of land availability to study whether the procyclicality of local real estate prices influences firm risk independent of the procyclicality of the local economy. Thus, both the portfolio formed and firm-level analyses provide a more direct evidence of the positive relation between the procyclicality of local real estate prices and firm risk.
{"title":"Firm location and systematic risk: the real estate channel","authors":"Xiang Gao, John C. Topuz","doi":"10.1108/raf-05-2019-0109","DOIUrl":"https://doi.org/10.1108/raf-05-2019-0109","url":null,"abstract":"Purpose - This paper aims to investigate whether the cyclicality of local real estate prices affects the systematic risk of local firms using a geography-based measure of land availability as a quasi-exogenous proxy for real estate price cyclicality. Design/methodology/approach - This paper uses the geography-based land availability measure as a proxy for the procyclicality of real estate prices and the location of a firm’s headquarters as a proxy for the location of its real estate assets. Four-factor asset pricing model (market, size, value and momentum factors) is used to examine whether firms headquartered in more land-constrained metropolitan statistical areas have higher systematic risks. Findings - The results show that real estate prices are more procyclical in areas with lower land availability and firms headquartered in these areas have higher systematic risk. This effect is more pronounced for firms with higher real estate holdings as a ratio of their tangible assets. Moreover, there are no abnormal returns to trading strategies based on land availability, consistent with stock market betas reflecting this local real estate factor. Research limitations/implications - This paper contributes to the literature on local asset pricing factors, the collateral role of firms’ real estate holdings and the co-movement of security prices of geographically close firms. Practical implications - This paper has important managerial implications by showing that, when firms decide on the location of their buildings (e.g. headquarters building, manufacturing plant and retail outlet), the location’s influence on systematic risk should be part of the decision-making process. Originality/value - This paper is among the first to use a geography-based measure of land availability to study whether the procyclicality of local real estate prices influences firm risk independent of the procyclicality of the local economy. Thus, both the portfolio formed and firm-level analyses provide a more direct evidence of the positive relation between the procyclicality of local real estate prices and firm risk.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"387-409"},"PeriodicalIF":2.4,"publicationDate":"2020-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-05-2019-0109","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42291678","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-07-17DOI: 10.1108/raf-10-2019-0221
Hongkang Xu, Trung Pham, Mai Dao
The purpose of this study is to examine the influence of the readability of annual reports on firms’ ability to obtain trade credit from suppliers. Particularly, the authors conjecture that annual report readability helps firms obtain more trade credit from suppliers.,The authors use the Gunning Fog Index as the primary measure of annual report readability and the ratio of accounts payable to the book value of total assets as the measure of trade credit.,Results from the study of 4,754 firms during the 2004–2016 period indicate that suppliers extend more trade credit to firms with more readable financial reports. The authors’ results are robust to alternative measures of trade credit and annual report readability. The authors’ results remain robust when we control for firm fixed effects and potential endogeneity problems using the instrumental variable approach. A further test shows that the level of trade credit is higher for firms in business service industries, and that this relation is weakened when firms disclose less readable 10-K filings.,The authors’ findings provide new insight into the role of financial report readability in firms’ ability to obtain trade financing from suppliers. The authors’ results are also in line with the SEC’s encouragement that firms use plain English and easy language in financial reporting.
{"title":"Annual report readability and trade credit","authors":"Hongkang Xu, Trung Pham, Mai Dao","doi":"10.1108/raf-10-2019-0221","DOIUrl":"https://doi.org/10.1108/raf-10-2019-0221","url":null,"abstract":"The purpose of this study is to examine the influence of the readability of annual reports on firms’ ability to obtain trade credit from suppliers. Particularly, the authors conjecture that annual report readability helps firms obtain more trade credit from suppliers.,The authors use the Gunning Fog Index as the primary measure of annual report readability and the ratio of accounts payable to the book value of total assets as the measure of trade credit.,Results from the study of 4,754 firms during the 2004–2016 period indicate that suppliers extend more trade credit to firms with more readable financial reports. The authors’ results are robust to alternative measures of trade credit and annual report readability. The authors’ results remain robust when we control for firm fixed effects and potential endogeneity problems using the instrumental variable approach. A further test shows that the level of trade credit is higher for firms in business service industries, and that this relation is weakened when firms disclose less readable 10-K filings.,The authors’ findings provide new insight into the role of financial report readability in firms’ ability to obtain trade financing from suppliers. The authors’ results are also in line with the SEC’s encouragement that firms use plain English and easy language in financial reporting.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"363-385"},"PeriodicalIF":2.4,"publicationDate":"2020-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-10-2019-0221","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42753842","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-06-20DOI: 10.1108/raf-05-2019-0106
D. G. Paik, J. V. D. L. Smith, B. Lee, Sung-Wook Yoon
The purpose of this study is to investigate the relationship between off-balance-sheet (OBS) operating leases and long-term debt by analyzing firms’ debt risk profiles measured by the constraints on firms in the financial ratios in their debt covenants.,This study determines debt risk profiles using three measures: the ex ante probability of covenant violation (Demerjian and Owens, 2016), firms in violation of debt covenants and firms close to covenant violations.,High-risk firms according to all three measures, on average, have a significantly lower level of operating leases, indicating that these firms use OBS leases as a substitute for long-term debt. Interestingly, for firms operating in industries in which leases are widely available, firms with a high probability of covenant violation have a significantly higher level of operating leases, indicating that these firms use OBS leases as a complement to long-term debt. Further analysis indicates that lease financing is less costly than debt financing for these firms.,Overall, evidence of this study indicates that firms facing financial constraints may attempt to lease more of their assets, but the availability of leasing is constrained by their debt covenant obligations and the strength of the leasing market in its industry.,This study identifies states in which risky firms may treat leases as either complements or substitutes for long-term debt, implying that the leasing decision relates to the availability of an active leasing market for a firm’s assets and the firm’s financial constraints. The findings of this study support recent research showing that debt and leases are complementary in the presence of counterparty risk providing insight into the paradoxical relationship identified in prior research between leases and long-term debt.
本研究的目的是调查表外(OBS)经营租赁和长期债务之间的关系，通过分析公司的债务风险概况，衡量公司在其债务契约中的财务比率的约束。本研究使用三种指标确定债务风险概况:违约的事前概率(Demerjian and Owens, 2016)、违约的企业和接近违约的企业。根据这三个指标，高风险公司的平均经营租赁水平明显较低，这表明这些公司使用OBS租赁作为长期债务的替代品。有趣的是，对于在租赁广泛可用的行业中运营的公司来说，违约概率高的公司的经营租赁水平要高得多，这表明这些公司使用OBS租赁作为长期债务的补充。进一步分析表明，对这些公司来说，租赁融资的成本低于债务融资。总体而言，本研究的证据表明，面临财务约束的公司可能会尝试租赁更多的资产，但租赁的可用性受到其债务契约义务和行业租赁市场实力的限制。本研究确定了风险公司可能将租赁视为长期债务的补充或替代品的状态，这意味着租赁决策与公司资产的活跃租赁市场的可用性和公司的财务约束有关。本研究的结果支持了最近的研究结果，该研究表明，在交易对手风险存在的情况下，债务和租赁是互补的，为之前研究中发现的租赁和长期债务之间的矛盾关系提供了见解。
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Pub Date : 2020-05-13DOI: 10.1108/raf-07-2018-0139
Henri Akono
This paper aims to examine how compensation committees perceive audit quality as indicated by audit firm tenure. Using the contracting weight attached to earnings and cash flows in chief executive officer (CEO) compensation as proxy for the compensation committee’s perception of audit quality, the study examines whether compensation committees perceive performance metric informativeness as being affected by auditor tenure.,The paper regresses CEO cash compensation on accounting-based performance metrics and on interactions between auditor tenure and accounting-based performance metrics while controlling for other factors previously shown to affect CEO pay. Auditor tenure is measured using continuous and dichotomous variables.,Auditor tenure is associated with a reduced (positive) weight on earnings (operating cash flows), which suggests lower perceived audit quality as tenure lengthens consistent with the auditor closeness argument. This relation is asymmetric, i.e. the negative effect of longer auditor tenure on incentive contracting is more pronounced for positive earnings. The results are robust to using CEO total compensation as the compensation measure, as well as using level and change specifications.,The inability to control for audit partner tenure in assessing the effect of audit firm tenure on incentive contracting and the potential endogeneity between auditor tenure choice and incentive contracting are the main limitations of this study. Given the lack of information on US audit partner tenure, the study could not control for the audit partner tenure issue. However, the study has attempted to mitigate the endogeneity issue by using a Heckman selection model that includes in the first-stage a regression of auditor tenure on various firm, performance measure and CEO-related governance characteristics, based on existing models (Li et al., 2010).,Compensation committees view auditor tenure as an indicator of accounting quality in setting CEO pay. Further, long auditor tenure is perceived as detrimental to financial reporting integrity, particularly when earnings numbers suggest positive managerial performance and innovations.,This study provides empirical evidence that auditor tenure matters in setting executive pay. Further, this study shows evidence on the link between auditor tenure and audit quality from an internal user’s perspective. Prior studies have focused either on external users (investors, creditors) or on the preparer (using measures such as discretionary accruals or meet/beat analysts’ forecasts or forecast guidance).
本文的目的是研究薪酬委员会如何感知审计质量的审计事务所任期。利用首席执行官薪酬中与盈利和现金流相关的承包权重，作为薪酬委员会对审计质量感知的代理，该研究检验了薪酬委员会是否认为绩效指标的信息量受到审计师任期的影响。本文根据基于会计的绩效指标以及审计师任期与基于会计的绩效指标之间的相互作用，对CEO现金薪酬进行了回归，同时控制了之前显示的影响CEO薪酬的其他因素。审计师任期是用连续变量和二分类变量来衡量的。审计师的任期与盈余(经营性现金流量)的权重降低(正)相关，这表明随着任期的延长，审计质量的感知会降低，这与审计师的密切性论点一致。这种关系是不对称的，即较长的审计师任期对激励合同的负面影响对于正盈余更为明显。研究结果对CEO总薪酬作为薪酬度量，以及使用水平和变动规格具有鲁棒性。在评估审计事务所任期对激励性合同的影响时，无法控制审计合伙人任期以及审计师任期选择与激励性合同之间的潜在内生性是本研究的主要局限性。鉴于缺乏关于美国审计合伙人任期的信息，该研究无法控制审计合伙人任期问题。然而，该研究试图通过使用Heckman选择模型来缓解内生性问题，该模型基于现有模型，在第一阶段对不同公司的审计师任期、绩效指标和首席执行官相关的治理特征进行回归(Li et al.， 2010)。薪酬委员会将审计师的任期视为制定CEO薪酬时会计质量的一个指标。此外，长期的审计师任期被认为不利于财务报告的完整性，特别是当盈利数字表明积极的管理绩效和创新时。本研究提供了经验证据，证明审计师的任期对高管薪酬的设定有影响。此外，本研究从内部使用者的角度显示了审计师任期与审计质量之间联系的证据。先前的研究要么集中在外部使用者(投资者、债权人)，要么集中在编制者(使用诸如可自由支配的应计项目或达到/超过分析师预测或预测指导等措施)。
{"title":"Audit firm tenure and perceived audit quality: evidence from CEO incentive contracts","authors":"Henri Akono","doi":"10.1108/raf-07-2018-0139","DOIUrl":"https://doi.org/10.1108/raf-07-2018-0139","url":null,"abstract":"This paper aims to examine how compensation committees perceive audit quality as indicated by audit firm tenure. Using the contracting weight attached to earnings and cash flows in chief executive officer (CEO) compensation as proxy for the compensation committee’s perception of audit quality, the study examines whether compensation committees perceive performance metric informativeness as being affected by auditor tenure.,The paper regresses CEO cash compensation on accounting-based performance metrics and on interactions between auditor tenure and accounting-based performance metrics while controlling for other factors previously shown to affect CEO pay. Auditor tenure is measured using continuous and dichotomous variables.,Auditor tenure is associated with a reduced (positive) weight on earnings (operating cash flows), which suggests lower perceived audit quality as tenure lengthens consistent with the auditor closeness argument. This relation is asymmetric, i.e. the negative effect of longer auditor tenure on incentive contracting is more pronounced for positive earnings. The results are robust to using CEO total compensation as the compensation measure, as well as using level and change specifications.,The inability to control for audit partner tenure in assessing the effect of audit firm tenure on incentive contracting and the potential endogeneity between auditor tenure choice and incentive contracting are the main limitations of this study. Given the lack of information on US audit partner tenure, the study could not control for the audit partner tenure issue. However, the study has attempted to mitigate the endogeneity issue by using a Heckman selection model that includes in the first-stage a regression of auditor tenure on various firm, performance measure and CEO-related governance characteristics, based on existing models (Li et al., 2010).,Compensation committees view auditor tenure as an indicator of accounting quality in setting CEO pay. Further, long auditor tenure is perceived as detrimental to financial reporting integrity, particularly when earnings numbers suggest positive managerial performance and innovations.,This study provides empirical evidence that auditor tenure matters in setting executive pay. Further, this study shows evidence on the link between auditor tenure and audit quality from an internal user’s perspective. Prior studies have focused either on external users (investors, creditors) or on the preparer (using measures such as discretionary accruals or meet/beat analysts’ forecasts or forecast guidance).","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"313-337"},"PeriodicalIF":2.4,"publicationDate":"2020-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-07-2018-0139","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48349798","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-04-20DOI: 10.1108/RAF-10-2018-0224
J. Wang
This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.,A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure.,Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality.,This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing.,This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.
{"title":"Does analyst forecast dispersion represent investors’ perceived uncertainty toward earnings?","authors":"J. Wang","doi":"10.1108/RAF-10-2018-0224","DOIUrl":"https://doi.org/10.1108/RAF-10-2018-0224","url":null,"abstract":"This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.,A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure.,Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality.,This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing.,This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"289-312"},"PeriodicalIF":2.4,"publicationDate":"2020-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/RAF-10-2018-0224","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49025254","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-04-20DOI: 10.1108/raf-05-2018-0107
J. Krishnan, Jayanth K. Krishnan, Sophie Liang
The Dodd–Frank Act of 2010 exempts small, non-accelerated filers from compliance with Sarbanes–Oxley Act (SOX) Section 404b internal control audits. However, these firms are required to comply with other internal control regulations, namely, SOX Sections 302 and 404a, starting in 2002 and 2007, respectively. A small number of these firms also voluntarily adopted (and sometimes dropped) Section 404b during 2004-2010. The purpose of this study is to investigate the impact of a series of internal control regulations introduced by SOX on the financial reporting quality of small firms.,The research design for this study is empirical. Using unsigned and signed discretionary accruals as measures of financial reporting quality, the authors compare the financial reporting quality for adopters and non-adopters across four regulation regimes over the period 2000-2010: PRESOX, SOX 302, SOX 404a and SOX 404b.,The results indicate that most of the adopters and non-adopters benefited from SOX 302 and 404a compared with the PRESOX period. However, only the non-adopters gained incrementally when moving from SOX 302 to SOX 404a. Also, Section 404b benefited firms with material weaknesses, as well as firms without material weaknesses that had the lowest reporting quality, in the PRESOX period.,This study helps inform the important policy debate on whether to increase the threshold that is used for the SOX 404b exemption. It shows incremental benefits for firms that adopted Section 404b audits, even when they were complying with Section 302 and Section 404a. Consequently, extending the exemption to more companies would result in a loss of the reporting quality benefit of 404b.,This study contributes to the literature by focusing exclusively on non-accelerated filers and by examining differences across four regulation regimes over a long window compared to prior studies. It provides evidence that the financial reporting benefit of SOX 404b is not transitional, but rather extends for a few years even after some firms discontinued the 404b audits.
{"title":"Internal control and financial reporting quality of small firms","authors":"J. Krishnan, Jayanth K. Krishnan, Sophie Liang","doi":"10.1108/raf-05-2018-0107","DOIUrl":"https://doi.org/10.1108/raf-05-2018-0107","url":null,"abstract":"The Dodd–Frank Act of 2010 exempts small, non-accelerated filers from compliance with Sarbanes–Oxley Act (SOX) Section 404b internal control audits. However, these firms are required to comply with other internal control regulations, namely, SOX Sections 302 and 404a, starting in 2002 and 2007, respectively. A small number of these firms also voluntarily adopted (and sometimes dropped) Section 404b during 2004-2010. The purpose of this study is to investigate the impact of a series of internal control regulations introduced by SOX on the financial reporting quality of small firms.,The research design for this study is empirical. Using unsigned and signed discretionary accruals as measures of financial reporting quality, the authors compare the financial reporting quality for adopters and non-adopters across four regulation regimes over the period 2000-2010: PRESOX, SOX 302, SOX 404a and SOX 404b.,The results indicate that most of the adopters and non-adopters benefited from SOX 302 and 404a compared with the PRESOX period. However, only the non-adopters gained incrementally when moving from SOX 302 to SOX 404a. Also, Section 404b benefited firms with material weaknesses, as well as firms without material weaknesses that had the lowest reporting quality, in the PRESOX period.,This study helps inform the important policy debate on whether to increase the threshold that is used for the SOX 404b exemption. It shows incremental benefits for firms that adopted Section 404b audits, even when they were complying with Section 302 and Section 404a. Consequently, extending the exemption to more companies would result in a loss of the reporting quality benefit of 404b.,This study contributes to the literature by focusing exclusively on non-accelerated filers and by examining differences across four regulation regimes over a long window compared to prior studies. It provides evidence that the financial reporting benefit of SOX 404b is not transitional, but rather extends for a few years even after some firms discontinued the 404b audits.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"221-246"},"PeriodicalIF":2.4,"publicationDate":"2020-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-05-2018-0107","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42220628","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-04-10DOI: 10.1108/raf-10-2018-0207
H. Chan, Brett S. Kawada, Taekjin Shin, Jeff J. Wang
This study aims to examine whether the pay gap between the chief executive officer (CEO) and non-executive employees affects the firm’s research and development (R&D) efficiency.,The dependent variable is the firm’s R&D efficiency, defined as a percentage increase in revenue from a 1-per cent increase in R&D spending. The main independent variable is the CEO-employee pay gap, defined as the ratio of annual total compensation for the CEO to the average of non-executive employees of the firm. The authors estimate fixed-effects models to examine the association between R&D efficiency and the pay gap between CEO and non-executive employees.,Results indicate a negative and significant association between R&D efficiency and CEO-employee pay gap, which suggests that a wider pay gap reduces employee motivation and effort, consistent with pay equity theory. We also find that the CEO-employee pay gap negatively moderates the relationship between employee pay growth and R&D efficiency,Recently enacted pay gap disclosure requirements mandated by the Dodd-Frank Act will make the disparity between CEO and non-executive compensation more salient. This study provides evidence of a firm outcome associated with that disparity.,This study is among the first to investigate the impact of the pay gap on R&D efficiency, a firm outcome not previously explored in the literature. This study also investigates CEO-employee pay gap’s role as a factor that moderates the effects of employee pay growth and institutional ownership on R&D efficiency
{"title":"CEO-employee pay gap and firm R&D efficiency","authors":"H. Chan, Brett S. Kawada, Taekjin Shin, Jeff J. Wang","doi":"10.1108/raf-10-2018-0207","DOIUrl":"https://doi.org/10.1108/raf-10-2018-0207","url":null,"abstract":"This study aims to examine whether the pay gap between the chief executive officer (CEO) and non-executive employees affects the firm’s research and development (R&D) efficiency.,The dependent variable is the firm’s R&D efficiency, defined as a percentage increase in revenue from a 1-per cent increase in R&D spending. The main independent variable is the CEO-employee pay gap, defined as the ratio of annual total compensation for the CEO to the average of non-executive employees of the firm. The authors estimate fixed-effects models to examine the association between R&D efficiency and the pay gap between CEO and non-executive employees.,Results indicate a negative and significant association between R&D efficiency and CEO-employee pay gap, which suggests that a wider pay gap reduces employee motivation and effort, consistent with pay equity theory. We also find that the CEO-employee pay gap negatively moderates the relationship between employee pay growth and R&D efficiency,Recently enacted pay gap disclosure requirements mandated by the Dodd-Frank Act will make the disparity between CEO and non-executive compensation more salient. This study provides evidence of a firm outcome associated with that disparity.,This study is among the first to investigate the impact of the pay gap on R&D efficiency, a firm outcome not previously explored in the literature. This study also investigates CEO-employee pay gap’s role as a factor that moderates the effects of employee pay growth and institutional ownership on R&D efficiency","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"19 1","pages":"271-287"},"PeriodicalIF":2.4,"publicationDate":"2020-04-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-10-2018-0207","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48727299","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-04-01DOI: 10.1108/raf-11-2016-0184
Izidin El Kalak, R. Hudson
Purpose This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices. Design/methodology/approach Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag. Findings The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period. Research limitations/implications This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads). Originality/value There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.
{"title":"The cross-market efficiency of the Italian derivatives market","authors":"Izidin El Kalak, R. Hudson","doi":"10.1108/raf-11-2016-0184","DOIUrl":"https://doi.org/10.1108/raf-11-2016-0184","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices.\u0000\u0000\u0000Design/methodology/approach\u0000Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag.\u0000\u0000\u0000Findings\u0000The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period.\u0000\u0000\u0000Research limitations/implications\u0000This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads).\u0000\u0000\u0000Originality/value\u0000There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"1 1","pages":""},"PeriodicalIF":2.4,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1108/raf-11-2016-0184","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43334021","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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